Nomura suggests that expectations need to be realistic as not all reforms can be announced in the budget and a number of policy changes will happen outside the budget
The Narenda Modi-led National Democratic Alliance (NDA) government is set to present its first budget on 10th July. People do have a lots of expectations from the budget of finance minister Arun Jaitley. "Expectations need to be realistic as as unrealistic expectations such as dismantling of subsidies in the budget itself have led to disappointment. Not all reforms can be announced in the budget and a number of policy changes will happen outside the budget; nevertheless, our bias is for a good budget," says Nomura.
Nomura says, the finance minister likely to present the government's strategy in the budget. "Hence, we expect the budget to contain a mix of statements of intent (talk) and actual announcements (walk). We do expect the fiscal deficit to be higher in FY15, but medium-term fiscal consolidation backed by a plan for lowering subsidies and GST implementation along with stable tax policies, a focus on boosting investment and lack of unnecessary populism should make this a good budget, in our view," it added.
"More importantly, " Nomura said, "the pace of activity outside the budget is picking up. Approvals are likely to pick up pace given the government's intention to approve environment, forest and other applications online going forward. Firms have started to raise equity capital, enabling them to de-leverage their balance sheet. Sentiment has turned positive and the pick up in May and June auto sales indicates that discretionary consumer demand is starting to see a gradual revival. Meanwhile, the government's decision to raise minimum support prices by around 2%, much lower than the last five-year average, along with moderating nominal rural wages suggests that the process of disinflation is gradually getting under way, notwithstanding the bumps caused by monsoons. Therefore, we believe that India is at an inflection point and we are positive on the medium-term economic prospects. We expect real GDP growth to rise from around 5% in FY15 to 6.5% in FY16."
Promise a stable tax regime
Given concerns about “tax terrorism”, Nomura says, it expect the government to postpone the implementation of General Anti-Avoidance Rules (GAAR ) by another year to April 2017, annulling the previous government's decision to implement it retrospectively and exempting transactions made up to March 2013. The rules are aimed at minimising tax avoidance by entities based in tax havens. "Further, we expect the government to rationalise the tax-filing procedure for small and medium-sized enterprises (SMEs) in order to ease tax compliance," it added
Encourage household financial savings
Nomura expects the tax deduction limit under section 80C to be raised to Rs2 lakh from Rs1 lakh. "This will raise households' disposable incomes, but also encourage household financial savings. Additionally, specific tax breaks could be announced to encourage retail investment in infrastructure bonds," the research note added.
Here are sector-wise expectations of Nomura from the Budget...
Excise duty cuts in February 2014 have already been extended by the government until December 2014. We do not have any other major expectations from the budget. However, the government may introduce some duty incentives on Electric/ Hybrid vehicles which may be minor positive for M&M's Reva electric vehicles. Further, if the government decides to increase Income Tax slabs or increase benefits under Section 80C, this would lead to an increase in disposable incomes which would be positive for auto demand, in our view.
We expect a significant hike in cigarette taxation. With the government focused on health and the target being to cut tobacco consumption, we believe this is fairly likely. A drastic version could be either a multiple times increase or ad valorem duty being imposed. Stock impacted is ITC.
We expect a higher allocation for capital infusion for PSU banks – the interim budget had an allocation of Rs112 billion. Tax breaks on instruments to raise long-term financing for infrastructure. The government has withdrawn the Rs20,000 exemption it had provided earlier.
Apart from the above, overall bond yields imply that fiscal consolidation should continue with a meaningful reduction in subsidy related expenditure.
We expect the government to stress the importance of infrastructure creation from a long-term perspective. In terms of actual measures, we believe the government could:
• Announce changes in pension funds' exposure towards equity markets and/or infrastructure assets that could bring in long-term funds for the sector.
• Announce the creation of an umbrella national fund for infrastructure projects, which in turn could source funds from China or Japan – such a body could in turn award projects on an EPC basis thereby reducing PPP need.
• Spell out norms for attracting long-term debt for infrastructure projects and reduce mismatch between project life and debt maturity.
• Remove SEZ units from MAT purview and/or provide incentives to manufacturing-based SEZ developers/units to incentivise domestic manufacturing facility set up.
• Stress on railway capex – new tracks, rolling stock.
• Allow REITs and/or Business Trust listings in India that could allow long-term funding for infrastructure projects.
We have no major expectations from the budget. A long-shot possibility is that Minimum Alternate Tax (MAT) on SEZs could be removed, which would be a minor positive.
The DTH (Direct to Home) industry is burdened with multiple taxation, including entertainment tax to the state government and service tax to the central government. DTH companies have raised this concern in meetings with the Minister of State for Information and Broadcasting, Prakash Javadekar, and expect abatement of the service tax. DTH companies also expect reduction in license fee from 10% to 6%. Depreciation of the INR vs the USD has put huge pressure on MSO (Multi System Operator) and DTH companies as they import set-top boxes (STB). So DTH and cable companies have requested that the government reduce customs duty on STB, which was increased from 5% to 10% in the 2013 budget. DTH companies have been requesting for tax rationalisation and reduction in license fee before budget over the past 2-3 years but no positive steps have been taken by the government. So, we are not too optimistic on the budget 2014, but any tax rationalisation would be positive for DTH companies including Dish TV.
Oil & gas
Since this is the first budget for the new government, and there has been less time to prepare and understand key issues, we believe the government may not make many concrete announcements too soon. But, it may give a positive spin saying that it will take steps to encourage investment in the oil & gas sector, and take more steps to reduce fuel under-recoveries.
The government will likely announce in the budget:
1) that diesel hikes will continue and diesel will soon be deregulated;
2) that direct benefit transfer for LPG will restart; and
3) a credible number for budgetary subsidy. It is likely that the government will do away with the previous government's practice of deferring subsidy pay-outs to the next year.
Items that we believe would be favourable for the O&G sector but which the government will likely leave out of the budget might include:
1) nominal monthly price increases for kerosene and LPG;
2) removal of the 5% import duty on LNG – this has been a long-standing industry demand, but the previous government had exempted only LNG imports by power producers; and
3) declared goods status for natural gas (similar to coal, crude oil).
For the pharma industry, the key incentive is a 200% deduction allowed on R&D expenditure. It is possible that this deduction will be increased to 250%. Currently only in-house R&D is allowed deduction. Since increasingly a large part of the R&D is outsourced, expenditure incurred on outsourced activities may also get the benefit.
Expenditures related to bio-equivalence studies, clinical trials which are generally outsourced may get the benefit of the 200% deduction. Increasing tax exemption for setting up hospitals is an industry demand which may be considered. Currently five years tax holiday is allowed under section 80-IB. This may be extended to 10 years. Further currently Hospitals set up in Metros are excluded from this benefit which may also be addressed in the budget.
Arguably, expectations from the budget have been raised following Piyush Goyal (Minister for Power, Coal and Renewable Energy) commenting that “There are a lot of innovative things in the new budget” in a recent media interview and the Government's mission to provide “24x7 electricity”. In our view, while the government's intent on augmenting domestic coal availability and facilitating higher capacity utilization (State Discoms to seek long-term PPAs) would likely require changes/ tweaks in various laws (Acts), which would typically be outside the purview of the Budget, directional statements towards the same may well be included in the FM's Budget Speech.
Specifically, the following issues could be addressed in the upcoming Union/ Railway Budget, in our view:
• Extension of Section 80-IA tax holiday for new power generation/ transmission projects for 2-3 years
• Sops (tax concessions / grants / incentives) to promote investment into renewable energy, particularly Solar Power. In tandem, utilization of National Clean Energy Fund (which entails an Rs50/ton cess on coal consumed) could be reviewed.
• Directional statement on policy relating to utilization of surplus captive coal, coal block auctions, rationalization of coal linkages, incentivizing States to ensure reduction in T&D losses, extension of the Financial Restructuring Package (FRP) for State Discoms. Land Acquisition
• Setting up of a funding facility to provide last-mile financing for projects stranded due to paucity of funds / pending project clearances
• Railways – procurement of wagons / augmentation of rolling stock / specific timelines + milestones for build-out of the three trunk railway links (one each in Jharkhand, Odisha and Chhattisgarh) critical to expand coal evacuation capacity.
• Customs duty on import of equipment and fuel (coal / gas)
• Disinvestment targets and candidates for listing / sell-off.
Spectrum auctions: we expect estimates of how much the government is looking to raise from spectrum auctions of 800MHz/ 900MHz/ 1800MHz bands.
Telecom infrastructure: given broadband growth was highlighted in the BJP's manifesto, we expect the government to outline some plans – expecting colour on how much it looks to spend on broadband network development.
Taxes/ duties on devices: this is another area which the government could look to tweak.